August 12, 2021 • 12 mins
As our series reaches its fourth episode, the conversation shifts to focus on anti-money laundering and financial crime prevention as it pertains to cryptoassets. Adam Rodricks, National Lead, Digital Services is back to host this episode, joined by Rebecca Ip, Partner, Forensic & Financial Crimes; Kunal Bhasin, Senior Manager, Technology Risk Consulting; and Mitchell Nicholson, Senior Consultant, Technology Risk Consulting. The group discusses the various regulations that surround crypto as set out by FINTRAC and FAFT and highlights some of the risks to be mindful of when dealing with virtual currencies.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Hello everybody and welcome. I’m your host Adam Rodricks. Today, I am elated to welcome you to the final episode in our special KPMG PodBytes series entitled ‘The State of Cryptoassets’. If you missed our first episodes, I encourage you to check them out as well. I’m joined today by my esteemed colleagues in Technology Risk Consulting, Mitch and Kunal. We’re also joined by Rebecca Ip, a Partner from our Financial Crimes practice. Welcome everyone. Can we start off with some roundtable introductions? We’ll start off with you Mitch; please let everyone know what you do at the firm.
(00:37):
Thanks Adam, it’s a pleasure to be here. Mitchell Nicholson here; I’ve been with the firm for a few months and I'm trying to get involved into everything crypto related.
Hey Adam! Always a pleasure to be here. I’m Kunal Bhasin. I'm a Senior Manager on our Risk Consulting practice and I co-lead our blockchain and cryptoasset efforts in Risk Consulting alongside Kareem Sadek.
(00:59):
Hi everyone, my name is Rebecca Ip, and I'm a Partner within our Financial Crimes practice in Risk Consulting and I look forward to our discussion today.
So do we! I believe this is your podcast debut, Rebecca! I want to kick off the discussion with you, and please don't think of me as picking on a newbie, but I know you're an expert in this space. I want to talk a little bit about anti-money laundering and financial crimes as it pertains to virtual currency. Could you start by running us through what types of organizations need to take the steps to comply with any applicable regulations in Canada?
(01:36):
Yes, certainly, thank you Adam. In Canada, if organizations are involved in specific virtual currency related services, then they will need to take steps to comply with applicable AML regulations. These services include virtual currency exchange and virtual currency transfer services. As examples, these may include exchanging of funds for virtual currencies (fiat to crypto), virtual currency for funds (crypto to fiat) or virtual currency for another virtual currency (crypto to crypto) as well as transferring virtual currency at the request of a client or receiving a transfer of virtual currency for remittance to a beneficiary.
(02:17):
If any organization is engaging any of the transactions I have mentioned above, then the companies will need to be registered as a money services business with FINTRAC. FINTRAC is Canada's financial intelligence unit; one must fulfill specific obligations as required by the proceeds of crime, money laundering and terrorism financing act and associate regulations, which includes some of those specific obligations including collecting customer information and analyzing transactional data.
(02:50):
I also want to point out that it is important for financial institutions to monitor any clients who may be involved with transferring of fiat funds from bank accounts to any virtual asset service providers. Banks need to monitor their exposure to these types of transactions if they are going to be sending money to countries or parties which might be sanctioned around the globe.
(03:19):
Rebecca, thank you so much. Kunal, I want to switch gears to you now. With this outline that Rebecca has so eloquently put in place for us, can you expand on the changes to regulations and when these will potentially go into effect?
For sure. FINTRAC, as Rebecca mentioned, has been releasing guidance and changes to its AML and terrorist financing regulations for the last couple of years. These changes are really to close any gaps stemming from the rise of cryptocurrencies, and these changes are now being enforced as of June 1st, 2021 – just a couple weeks before we record this podcast.
(04:03):
A major change is the reporting of large virtual currency transactions, or LVCTR for shot, when the exchanges or the users are transacting crypto that is equivalent to 10,000 dollars or more in Canadian dollars. In addition to that, the compliance program for these organizations should also be able to identify, assess, and report any suspicious transactions based on the money laundering and terrorism financing indicators that have specifically been identified for cryptocurrencies. The guidance for these indicators was released in December of 2020. Money laundering and terrorism financing indicators include use of any privacy coins, mixers, joiners, wallet addresses, OFAC sanction list, et cetera.
(05:01):
Regulators will be reviewing compliance with these requirements for all these organizations between June 2021 and March 2022. Regulators are taking a flexible approach because, let's be honest, they realize that this is a significant undertaking and not all reporting entities would be able to meet these requirements. In that case, regulators have set a minimum set of expectations such as keeping the records of reportable transactions as of June 1st, 2021, completing the implementation of its large value crypto transaction reporting system no later than December 1, 2021, and submitting all unreported transactions by March 31st, 2022.
(05:55):
You know, Kunal, you always keep me on my toes, but in addition to that, you've also got me frantically taking down some critical dates in my calendar. Thank you for that rundown. Rebecca, I want to come back to you. What are some of the key steps that organizations should take in meeting these requirements that we just discussed?
Thank you, Adam and thank you, Kunal for reminding our listeners about all the key dates. With respect to setting up a compliance program for crypto organizations or existing institutions offering this new type of services, they will either need to update or set up the program. Some of the required elements of the compliance program include designating a compliance officer with the focus on identifying and declaring money laundering and terrorist financing activities at these organizations. This will include developing or updating complete policies and procedures to include cryptocurrency, conducting risk assessment of business activities as it relates to crypto, as well as identifying the money laundering and terrorist financing triggers or alerts. This will assist the organization in complying to the requirement to file suspicious transaction reports as well as large value transactions.
(07:24):
I think it's really important to obviously understand what those regulations are and understand what those program elements are, because in our experience, these crypto organizations might not have the experience, or might not have the personnel to really understand and navigate the requirements that are being set up by FINTRAC and in order to comply to the AML act as a whole.
(07:50):
Last but not least, as part of the requirement, companies do require an independent review of its compliance program every 2 years. So not only is it required to set up a program but having the ongoing monitoring and ongoing review to ensure that the compliance is working as designed and operate as effectively as it should.
(08:13):
Wow, certainly a lot of things that consider there. Thank you so much for the run down, Rebecca. What are the key challenges that organizations typically face in setting up their programs?
That's a great question, Adam. Compliance programs are complex and resource intensive as Rebecca can attest to. When you add the crypto component to it, there are some unique challenges given the nature of cryptocurrencies. If you think about financial institutions that are monitoring their exposure to crypto, they need to (in near real time) assess whether the wire transfer or a transfer their user is making is going to a non-compliant virtual assets service providers institution these service providers could be located anywhere on the globe, even in sanctioned jurisdictions. One must consider how financial institutions keep track of all of this information and make sure that they're taking the necessary steps to avoid transfer of fiat onto these institutions.
(09:22):
Now, if you think about those that are involved in fiat to crypto and crypto to crypto transactions, there are even more challenges that that need to be overcome, such as implementing case management capabilities and putting the processes in place to identify each of these MLDF indicators that are relevant for their business, assessing these and then reporting these STRs and large value transactions.
(09:48):
Another big one that has been discussed a lot in the industry is the travel rule compliance for crypto. The FATF, which is the Financial Action Task Force, have recommended that the crypto industry complies with the same travel rule requirements as the fiat world, where VASPs have the obligation to obtain all and transmit any required originator and beneficiary information associated with virtual asset transfers. This was done in order to identify and report any suspicious transactions; to either take freezing actions and also prohibit transactions, like designated persons and entities.
(10:23):
There are entities out there such as the blockchain intelligence or on-chain analytics companies that provide such services. The challenge that these organizations need to overcome is how they integrate all of these functionalities, these processes within their ongoing day-to-day operations and take adequate steps accordingly.
(10:49):
Thanks, Kunal. To add on to that point, for Bitcoin and other cryptocurrencies, the underlying blockchain technology is really an immutable ledger. This means that all transactions that are settled on the network are recorded for the entire history on the ledger. From a reporting point of view, as blockchain analytics firms improve in their ability to analyze transactions, many virtual asset service providers will be able to gain comfort in meeting requirements, such as the FATF travel rule, as the data can be analyzed and each hop between transactions can be reviewed in more detail.
(11:27):
I love that. I know we could go deeper and that’s why we’ve brought this special four-part series on the current state of cryptoassets, so if you missed any of our earlier episodes be sure to check out the PodBytes channel to given them a listen. For today, I want to thank our three guests Mitch, Kunal and Rebecca for taking time out of their busy schedules to be with us in studio. As we conclude our series with this episode, our most sincere gratitude to Edwin, Rebecca, Mitch, Kunal and Kareem for all of their valuable insights. Once again, I’m your host Adam Rodricks and thank you for listening. Bye everybody!
Hello everybody and welcome. I’m your host Adam Rodricks. Today, I am elated to welcome you to the final episode in our special KPMG PodBytes series entitled ‘The State of Cryptoassets’. If you missed our first episodes, I encourage you to check them out as well. I’m joined today by my esteemed colleagues in Technology Risk Consulting, Mitch and Kunal. We’re also joined by Rebecca Ip, a Partner from our Financial Crimes practice. Welcome everyone. Can we start off with some roundtable introductions? We’ll start off with you Mitch; please let everyone know what you do at the firm.
(00:37):
Thanks Adam, it’s a pleasure to be here. Mitchell Nicholson here; I’ve been with the firm for a few months and I'm trying to get involved into everything crypto related.
Hey Adam! Always a pleasure to be here. I’m Kunal Bhasin. I'm a Senior Manager on our Risk Consulting practice and I co-lead our blockchain and cryptoasset efforts in Risk Consulting alongside Kareem Sadek.
(00:59):
Hi everyone, my name is Rebecca Ip, and I'm a Partner within our Financial Crimes practice in Risk Consulting and I look forward to our discussion today.
So do we! I believe this is your podcast debut, Rebecca! I want to kick off the discussion with you, and please don't think of me as picking on a newbie, but I know you're an expert in this space. I want to talk a little bit about anti-money laundering and financial crimes as it pertains to virtual currency. Could you start by running us through what types of organizations need to take the steps to comply with any applicable regulations in Canada?
(01:36):
Yes, certainly, thank you Adam. In Canada, if organizations are involved in specific virtual currency related services, then they will need to take steps to comply with applicable AML regulations. These services include virtual currency exchange and virtual currency transfer services. As examples, these may include exchanging of funds for virtual currencies (fiat to crypto), virtual currency for funds (crypto to fiat) or virtual currency for another virtual currency (crypto to crypto) as well as transferring virtual currency at the request of a client or receiving a transfer of virtual currency for remittance to a beneficiary.
(02:17):
If any organization is engaging any of the transactions I have mentioned above, then the companies will need to be registered as a money services business with FINTRAC. FINTRAC is Canada's financial intelligence unit; one must fulfill specific obligations as required by the proceeds of crime, money laundering and terrorism financing act and associate regulations, which includes some of those specific obligations including collecting customer information and analyzing transactional data.
(02:50):
I also want to point out that it is important for financial institutions to monitor any clients who may be involved with transferring of fiat funds from bank accounts to any virtual asset service providers. Banks need to monitor their exposure to these types of transactions if they are going to be sending money to countries or parties which might be sanctioned around the globe.
(03:19):
Rebecca, thank you so much. Kunal, I want to switch gears to you now. With this outline that Rebecca has so eloquently put in place for us, can you expand on the changes to regulations and when these will potentially go into effect?
For sure. FINTRAC, as Rebecca mentioned, has been releasing guidance and changes to its AML and terrorist financing regulations for the last couple of years. These changes are really to close any gaps stemming from the rise of cryptocurrencies, and these changes are now being enforced as of June 1st, 2021 – just a couple weeks before we record this podcast.
(04:03):
A major change is the reporting of large virtual currency transactions, or LVCTR for shot, when the exchanges or the users are transacting crypto that is equivalent to 10,000 dollars or more in Canadian dollars. In addition to that, the compliance program for these organizations should also be able to identify, assess, and report any suspicious transactions based on the money laundering and terrorism financing indicators that have specifically been identified for cryptocurrencies. The guidance for these indicators was released in December of 2020. Money laundering and terrorism financing indicators include use of any privacy coins, mixers, joiners, wallet addresses, OFAC sanction list, et cetera.
(05:01):
Regulators will be reviewing compliance with these requirements for all these organizations between June 2021 and March 2022. Regulators are taking a flexible approach because, let's be honest, they realize that this is a significant undertaking and not all reporting entities would be able to meet these requirements. In that case, regulators have set a minimum set of expectations such as keeping the records of reportable transactions as of June 1st, 2021, completing the implementation of its large value crypto transaction reporting system no later than December 1, 2021, and submitting all unreported transactions by March 31st, 2022.
(05:55):
You know, Kunal, you always keep me on my toes, but in addition to that, you've also got me frantically taking down some critical dates in my calendar. Thank you for that rundown. Rebecca, I want to come back to you. What are some of the key steps that organizations should take in meeting these requirements that we just discussed?
Thank you, Adam and thank you, Kunal for reminding our listeners about all the key dates. With respect to setting up a compliance program for crypto organizations or existing institutions offering this new type of services, they will either need to update or set up the program. Some of the required elements of the compliance program include designating a compliance officer with the focus on identifying and declaring money laundering and terrorist financing activities at these organizations. This will include developing or updating complete policies and procedures to include cryptocurrency, conducting risk assessment of business activities as it relates to crypto, as well as identifying the money laundering and terrorist financing triggers or alerts. This will assist the organization in complying to the requirement to file suspicious transaction reports as well as large value transactions.
(07:24):
I think it's really important to obviously understand what those regulations are and understand what those program elements are, because in our experience, these crypto organizations might not have the experience, or might not have the personnel to really understand and navigate the requirements that are being set up by FINTRAC and in order to comply to the AML act as a whole.
(07:50):
Last but not least, as part of the requirement, companies do require an independent review of its compliance program every 2 years. So not only is it required to set up a program but having the ongoing monitoring and ongoing review to ensure that the compliance is working as designed and operate as effectively as it should.
(08:13):
Wow, certainly a lot of things that consider there. Thank you so much for the run down, Rebecca. What are the key challenges that organizations typically face in setting up their programs?
That's a great question, Adam. Compliance programs are complex and resource intensive as Rebecca can attest to. When you add the crypto component to it, there are some unique challenges given the nature of cryptocurrencies. If you think about financial institutions that are monitoring their exposure to crypto, they need to (in near real time) assess whether the wire transfer or a transfer their user is making is going to a non-compliant virtual assets service providers institution these service providers could be located anywhere on the globe, even in sanctioned jurisdictions. One must consider how financial institutions keep track of all of this information and make sure that they're taking the necessary steps to avoid transfer of fiat onto these institutions.
(09:22):
Now, if you think about those that are involved in fiat to crypto and crypto to crypto transactions, there are even more challenges that that need to be overcome, such as implementing case management capabilities and putting the processes in place to identify each of these MLDF indicators that are relevant for their business, assessing these and then reporting these STRs and large value transactions.
(09:48):
Another big one that has been discussed a lot in the industry is the travel rule compliance for crypto. The FATF, which is the Financial Action Task Force, have recommended that the crypto industry complies with the same travel rule requirements as the fiat world, where VASPs have the obligation to obtain all and transmit any required originator and beneficiary information associated with virtual asset transfers. This was done in order to identify and report any suspicious transactions; to either take freezing actions and also prohibit transactions, like designated persons and entities.
(10:23):
There are entities out there such as the blockchain intelligence or on-chain analytics companies that provide such services. The challenge that these organizations need to overcome is how they integrate all of these functionalities, these processes within their ongoing day-to-day operations and take adequate steps accordingly.
(10:49):
Thanks, Kunal. To add on to that point, for Bitcoin and other cryptocurrencies, the underlying blockchain technology is really an immutable ledger. This means that all transactions that are settled on the network are recorded for the entire history on the ledger. From a reporting point of view, as blockchain analytics firms improve in their ability to analyze transactions, many virtual asset service providers will be able to gain comfort in meeting requirements, such as the FATF travel rule, as the data can be analyzed and each hop between transactions can be reviewed in more detail.
(11:27):
I love that. I know we could go deeper and that’s why we’ve brought this special four-part series on the current state of cryptoassets, so if you missed any of our earlier episodes be sure to check out the PodBytes channel to given them a listen. For today, I want to thank our three guests Mitch, Kunal and Rebecca for taking time out of their busy schedules to be with us in studio. As we conclude our series with this episode, our most sincere gratitude to Edwin, Rebecca, Mitch, Kunal and Kareem for all of their valuable insights. Once again, I’m your host Adam Rodricks and thank you for listening. Bye everybody!
Popular Podcasts
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Nikki Glaser Podcast
Every week comedian and infamous roaster Nikki Glaser provides a fun, fast-paced, and brutally honest look into current pop-culture and her own personal life.